Pot tax pre­dic­tions tough

Re­view of early es­ti­mates giv­ing clar­ity for states mov­ing for­ward

The Denver Post - - NEWS - By Ali­cia Wal­lace

Colorado’s cannabis in­dus­try is on pace to gen­er­ate north of $213 mil­lion in state tax revenue by 2019, ac­cord­ing to the Colorado Leg­isla­tive Coun­cil’s lat­est eco­nomic and revenue fore­cast re­leased this week.

By The Cannabist’s cal­cu­la­tions, that amounts to nearly $1.7 bil­lion in sales of flower, con­cen­trates, ed­i­bles and other in­fused prod­ucts in the recre­ational and med­i­cal mar­i­juana mar­kets. But what’s in a num­ber? This fledg­ling in­dus­try is laden with pro­jec­tions, es­ti­mates and fore­casts. Multi­bil­lion-dol­lar figures have been as­cribed to lo­cales where a sin­gle le­gal adult-use sale has yet to even take place.

In Colorado, pot shop cash reg­is­ters have been ring­ing up recre­ational trans­ac­tions for nearly three years. As such, the state has ac­cu­mu­lated valu­able data.

We know that Colorado’s mar­i­juana in­dus­try has topped $1 bil­lion in sales through the first 10 months of 2016.

An­a­lyt­ics have grown more ro­bust, and there is a greater grasp on the del­i­cate in­ter­play of fac­tors such as price, sup­ply, de­mand, con­sumer pref­er­ences, lo­cal-spe­cific reg­u­la­tions and sea­sonal vari­a­tion.

“Here in Colorado, it’s not so neb­u­lous,” said Miles Light, a Univer­sity of Colorado econ­o­mist who co-founded the Den­ver­based Mar­i­juana Pol­icy Group, an in­de­pen­dent eco­nomic and mar­ket re­search firm that was com­mis­sioned for stud­ies by the state of Colorado. “But in other states? Not so much.”

As­sump­tions, blind spec­u­la­tion and the in­cor­rect ap­pli­ca­tion of Colorado-spe­cific data have re­sulted in over­es­ti­ma­tions by new mar­i­juana mar­kets such as Canada, Ne­vada and Florida, Light said.

When Colorado ini­ti­ated and im­ple­mented le­gal recre­ational mar­i­juana sales — a first-of-it­skind ac­tion — there were “silly mis­takes” in some of the ini­tial mod­els, eco­nomic fore­casts and pro­jec­tions, he said.

“But these mis­takes keep hap­pen­ing even to­day,” Light said.

A look back at the revenue pro­jec­tions made in ad­vance of Colorado’s ground­break­ing mar­i­juana le­gal­iza­tion, how the sales stacked up and where the lat­est pro­jec­tions stand show the chal­lenges that have popped up here and else­where since.

Early es­ti­mates

In Fe­bru­ary 2014, a few weeks into Colorado’s lit­tle ex­per­i­ment with le­gal mar­i­juana, came a big and bold procla­ma­tion from the state’s gov­er­nor: Colorado could very well stuff its cof­fers with nearly $134 mil­lion in tax and fee revenue dur­ing the first full fis­cal year of le­gal adult-use sales.

Just shy of the pro­gram’s first 100 days, Gov. John Hick­en­looper walked back those pro­jec­tions by more than $20 mil­lion af­ter get­ting a read of the Jan­uary 2014 mar­i­juana tax revenue re­port that fell short of early pro­jec­tions.

Still, even that re­vised es­ti­mate was quite bullish as com­pared to oth­ers tossed around in the pre-le­gal­iza­tion pe­riod. Re­ports pub­lished be­fore and af­ter the voter-ap­proved pas­sage of Amend­ment 64 in 2012 and the re­lated Propo­si­tion AA — a 2013 mea­sure es­tab­lish­ing two new state taxes on mar­i­juana — pre­dicted an­nual tax col­lec­tions in the realm of $5 mil­lion to $80 mil­lion.

Colorado gen­er­ated about $88 mil­lion in state tax revenue dur­ing that first 2014-15 fis­cal year (July to June), ac­cord­ing to state revenue records. In FY 201516, the tax revenue jumped 60 per­cent to $141.3 mil­lion.

The gap in the ini­tial state cal­cu­la­tions was rooted in a thought that all of the de­mand — es­ti­mated by var­i­ous groups to be be­tween 57.4 met­ric tons and 121.4 met­ric tons of cannabis — would be in the reg­u­lated space, said MPG’s Light. In re­al­ity, a share of that de­mand would be seen by the reg­u­lated mar­ket and grad­u­ally climb as those sales trans­ferred away from the black mar­ket.

“Those (2014 num­bers) are off be­cause the cannabis mar­ket is new, it’s evolv­ing and lo­cal-level de­ci­sions im­pact the mar­ket dy­nam­ics a lot more (than de­mand pro­jec­tions),” said An­drew Liv­ingston, pol­icy an­a­lyst at cannabis law firm Vi­cente Seder­berg.

Pre­dict­ing tax revenue not easy

In its 2012 re­port in ad­vance of Amend­ment 64, the Colorado Cen­ter on Law and Pol­icy’s flow chart showed how roughly a dozen po­ten­tial fac­tors — among them price elas­tic­ity and de­mand, pro­duc­tion and dis­tri­bu­tion changes, con­sump­tion changes, tax eva­sion and med­i­cal pa­tients switch­ing to the recre­ational mar­ket — could af­fect mar­i­juana con­sump­tion and, ul­ti­mately, the net ef­fect on Colorado’s budget:

“Higher reg­u­la­tory costs on the pro­ducer will cause a higher new price. This higher new price in­flu­ences the num­ber of users who would switch from med­i­cal mar­i­juana to newly le­gal­ized prod­ucts. Price af­fects con­sump­tion and a more ex­pen­sive prod­uct will have a down­ward ef­fect on con­sump­tion. Higher taxes will also cre­ate greater in­cen- tives to evade taxes. Any ad­just­ment in the blue fac­tors in the model will in­di­rectly im­pact the fi­nal out­comes.”

The Colorado Cen­ter on Law and Pol­icy pro­jected $47.3 mil­lion in new revenue for FY 2014-15, an es­ti­mate that did not in­clude the 10 per­cent spe­cial sales tax pro­posed later via Propo­si­tion AA, said re­port au­thor Chris Stiffler, who is now at the Colorado Fis­cal In­sti­tute. Stiffler ac­cu­rately pre­dicted that state revenue from the 15 per­cent ex­cise tax on whole­sale mar­i­juana trans­fers would to­tal $24 mil­lion in that first year.

Other coun­ter­parts, in­clud­ing the Colorado Fu­tures Cen­ter, also pro­jected that the ex­cise tax rev­enues would not sur­pass $40 mil­lion in its first year — in the Amend­ment 64 pro­posal, the first $40 mil­lion of an­nual returns are ear­marked for school construction projects. Any­thing above that goes into a des­ig­nated school gen­eral fund.

“It took us two years or so to get to that $40 mil­lion” and the sub­se­quent over­spill, Stiffler said.

In Ari­zona, the cam­paign op­pos­ing mar­i­juana-le­gal­iz­ing Propo­si­tion 205 ran tele­vi­sion ads claim­ing that Colorado schools never re­ceived any money from mar­i­juana. Colorado leg­is­la­tors later pub­licly re­futed those claims and called for the cam­paign to cease mak­ing such as­ser­tions.

Colorado reached that $40 mil­lion tar­get in FY 2015-16, ac­cord­ing to Depart­ment of Revenue data, and is well on its way to sur­pass­ing that in FY 2016-17. Big returns

Be it fis­cal year or cal­en­dar data, no mat­ter how you slice it, Colorado’s cannabis in­dus­try has hit its stride.

The track­ing of tax revenue and sales for the first 10 months of 2016 re­veal a $1 bil­lion in­dus­try that’s re­peat­edly set­ting records and has al­ready out­paced 2015’s $996 mil­lion in sales.

The in­dus­try’s cur­rent growth tra­jec­tory — bar­ring any sig­nif­i­cant changes on the fed­eral level — is ex­pected to con­tinue in Colorado, ac­cord­ing to the lat­est pro­jec­tions re­leased this week by the state. The Colorado Leg­isla­tive Coun­cil mapped out pro­jected state revenue in its 115-page eco­nomic fore­cast.

The coun­cil’s mar­i­juana tax es­ti­mates for up­com­ing fis­cal years break down like this: $188 mil­lion for FY 2016-17, $193.9 mil­lion for FY 2017-18 and $213.8 mil­lion for FY 2018-19.

That trans­lates into sales of nearly $1.4 bil­lion, $1.5 bil­lion and inch­ing to­ward $1.7 bil­lion, re­spec­tively. But as with a lot of facets of this emerg­ing in­dus­try, those num­bers could be mov­ing tar­gets.

“We re­ally don’t know how con­sumers’ tastes and pref­er­ences for cannabis are go­ing to change,” Liv­ingston said.

In ad­di­tion to a po­ten­tial mar­ket plateau, con­sumers will be pay­ing less tax start­ing July 1, 2017, when the spe­cial sales tax rate drops to 8 per­cent from 10 per­cent.

The many pre­dic­tions and pro­jec­tions for cannabis mar­kets are not with­out con­tro­versy.

The Mar­i­juana Pol­icy Group uti­lizes meth­ods rooted in eco­nomics and statis­tics to as­sist gov­ern­ments on pol­icy-mak­ing ef­forts and help busi­nesses bet­ter un­der­stand the mar­ket­place.

Light, who has a doc­tor­ate in eco­nomics, bris­tles at some of the “eye-pop­ping” pro­jec­tions look­ing four years out, how they some­times spread like wild­fire in the me­dia, and the po­ten­tial neg­a­tive con­se­quences they have on cur­rent de­ci­sion-mak­ing ef­forts.

“The per­cep­tion be­comes re­al­ity,” he said, cau­tion­ing against build­ing pol­icy around pro­jec­tions.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.